Summary: Industrial policy remains one of the most controversial issues in development economics. On September 14, 2009, the World Bank’s Development Research Group (DECRG) hosted a panel debate “Industrial Policy and the Role of the State in Promoting Growth.” The panel was comprised of three speakers: William Easterly (Professor, New York University), Ann Harrison (Research Manager, DECRG) and Justin Lin (World Bank Chief Economist and Senior Vice President.) The debate addressed the big questions concerning industrial policy - what are the market or policy failures involved? What is the effectiveness of industrial policy today?

The first viewpoint was given by Easterly, who provided an overview for the debate. Easterly posed the question: to what extent can we achieve economic development through economic development experts, versus the study of economics, using industrial policy as an example? He discussed the trajectory of development economics as a field of study, concluding that it is difficult to establish robust predictors of economic growth.

Harrison defined industrial policy as “any intervention which shifts incentives away from policy neutrality.” According to her, this is a broad conception of industrial policy that includes tax breaks to foreign investors, trade promotion and credit for promoters, as well as shifting incentives to promotable goods. Harrison stressed the importance of distinguishing between hard and soft industrial policies to specific interventions, subsidies in specific sectors versus diffuse mechanisms for encouraging certain kinds of behavior, and the cost of welfare.

Lin concluded the panel discussions by offering three main questions about the issue. Do we know the exact costs of industrial policies from the 1950’s-1970’s, and can we avoid the same mistakes? Can we know the exact reason for the success of the few economies that succeeded? Finally, Lin noted that the reason most countries experienced failed industrial policies in the past was because they wanted to use them to promote industries which refuted their competitive advantages.

The session featured a short questioning period from audience members and a thorough panel response. Among concerns, audience members were curious about the oft cited case of Korea, asking when does the government stop giving incentives to exporters?